Behind-the-scenes rebates take a growing bite out of pharma sales, industry-funded study says

meds
As drug prices continue to draw scrutiny, a new report commissioned by PhRMA shows that less than half of 2015's branded drug spending actually ended up in pharma coffers.

It’s been said over and over by pharma execs forced to defend high prices: A complex, opaque pricing and distribution system in the U.S. has helped drive up drug costs. Now, a new report commissioned by industry group PhRMA lends statistics to that argument.

One critical finding? In 2015, drug companies collected less than half of the total money spent on prescription drugs in the U.S. Branded pharma reaped 47% of the loot, while generics makers retained 23%, and “non-manufacturer stakeholders,” or the supply chain, kept 31%.

And it's no coincidence, the researchers say, that rebates and discounts have mushroomed in recent years. Those incentives, offered to payers to win coverage, amounted to $106 billion in 2015, up from $67 billion in 2013.

The report comes as pharma companies and their pricing decisions face unprecedented scrutiny, thanks to scandals, government investigations and high-deductible insurance plans that have forced patients to pay a large share of the cost for products such as Mylan's anaphylaxis injection EpiPen and the insulin injections crucial to diabetes treatment. Political pressure, which appeared to ease after Democrat Hillary Clinton lost the presidential election, has intensified over the past week as President-elect Donald Trump attacked the industry, calling for competitive bidding and Medicare price negotiation to keep the industry from "getting away with murder."

But the publicly reported prices for drugs that have raised so many eyebrows don't tell the whole story, the PhRMA-funded report states. Many pharmaceutical spending figures don’t account for rebates and discounts, providing a “misleading impression of drug spending,” the authors write. Aaron Vandervelde and Eleanor Blalock at the Berkeley Research Group completed the work.

For $469 billion in U.S. net drug spending—an amount after discounts and rebates to payers—branded drug companies took home $219 billion. Generics companies pocketed $108 billion, while the supply chain kept $125 billion. “Other” rebates and fees accounted for $17.5 billion, or 4% of the spend.

In exchange for formulary positions, drugmakers offer payers rebates and discounts, and those negotiations have grown increasingly tough. For 2015, the most recent data in the report, branded companies netted 63% of a med’s average list price, meaning more than a third was returned to other players in the distribution system.

More than a year ago, infamous price increases by Turing Pharmaceuticals and Valeant Pharmaceuticals triggered an intense round of scrutiny on the industry’s pricing that hasn’t abated since. Newly exposed hikes by EpiPen maker Mylan and others continued to fuel public outrage.

Along the way, some industry leaders have blamed the U.S. pharma distribution system. Mylan CEO Heather Bresch, for one, said payer rebates incentivize price increases and claimed “middlemen” take home more than half of EpiPen’s cost.

Novo Nordisk’s head of North America Operations, Jakob Riis, recently explained the issue in a blog post, describing the pricing system is “incredibly complex.” He added that, despite public perception, companies don’t realize an entire list price increase.

“All in all, we’ve simply tried maintaining a profit margin that has been dropping significantly since health policy changed in the U.S.,” Riis wrote. “With that, we also need to work together to improve the system and create more transparency.

As the pricing issue doesn’t seem likely to diminish, Moody’s recently said pharmacy benefits managers face a risk “as they themselves are scrutinized for playing a role in drug price inflation.”

The PhRMA-sponsored report is likely to be circulated by those looking to defend drugmakers as they continue to take a beating in headlines, most recently with harsh comments by President-elect Donald Trump.